As investors have grown more comfortable allocating more significant portions of portfolios to emerging markets, the number of ETFs offering exposure to these regions of the world has surged in recent years. Exchange-traded products now exist offering investors exposure to a variety of markets that were once hard-to-access for all but the largest and most sophisticated investors. As the "home country bias" has eased and developed market investors have embraced emerging market equities, the first shift was towards the most-well known of the emerging countries -- Brazil, India, and China. But many are now beginning to look beyond these three giants for attractive opportunities in smaller and often forgotten countries. Many of these markets, such as Colombia, Turkey, and Malaysia, have provided huge gains to investors bold enough to take a chance and venture beyond the often saturated markets of the BRIC economies.
One increasingly popular choice for investors eager to look beyond the BRIC is Indonesia, an emerging country in Southeast Asia that has managed to keep its economy humming along despite a rocky road for the global economy as a whole. Unlike many nations in the region, Indonesia -- the world's fourth most populous country -- has high levels of consumer spending. These traits have allowed the nation to weather the financial crisis better than many of its export-dependent neighbors, as the dynamic and continually growing consumer class kept the Indonesian economy afloat despite low demand in developed markets. The struggling economies in the U.S. and western Europe has begun to impact countries such as South Korea or China, which thrive on manufacturing and exporting to the West in order to power their continued growth [read Emerging Market ETF Investing: Beyond The BRIC].
The nation has also surged in recent years in terms of global competitiveness thanks to a healthy macroeconomic environment and an improved educational system that has helped to keep some of the smartest workers at home. Meanwhile, as costs accelerate in China and other more established manufacturing centers, it appears likely that businesses will move their operations to Indonesia, where labor costs are the second lowest in the ASEAN region -- cheaper than even Laos or Cambodia.
Because of these reasons, investors are increasingly looking at Indonesia as a key component in their emerging market allocations. While a number of products offer reasonable and even double digit exposure to the country, two country specific funds stand out as ways investors can achieve "pure play" exposure to the nation: the Market Vectors Indonesia ETF
Index & Holdings
IDX tracks the Market Vectors Indonesia Index, a benchmark that provides exposure to publicly traded companies that are domiciled and primarily listed in Indonesia, or that generate at least 50% of their revenues in Indonesia. Financial companies make up over one-fourth of the total holdings in IDX, with sizable allocations also going towards materials (15%), telecommunications (13%) and energy (12%) firms. IDX has fewer individual components than its iShares counterpart, with just 30 companies comprising the fund's holdings. Top companies include Bank Rakyat Indonesia, Astra International, and Bank Central Asia. In terms of market cap exposure, large and giant cap firms dominate the holdings, with less than 10% going to firms with a market capitalization of less than $5 billion.
Meanwhile, EIDO tracks the MSCI Indonesia Investable Market Index, a free-float adjusted market capitalization weighted benchmark designed to measure the performance of equity securities in the top 99% by market capitalization of equity securities listed on stock exchanges in Indonesia. The fund is most heavily-weighted towards financial companies (27%) with large allocations also going towards industrial materials (16%), consumer services (14%) and consumer goods (13%) firms [see the complete sector breakdown]. In terms of market cap exposure, the fund consists of stocks that are almost entirely in the giant or large cap segments with just 10% of the fund going towards medium cap securities or smaller. In total, EIDO consists of 56 different companies, with the largest individual holdings in Astra International, Telekomunikasi, and Bank Central Asia.
| IDX | EIDO | |
|---|---|---|
| Total Holdings | 30 | 56 |
| % Assets in Top 10 | 60% | 63% |
| Financial Allocation | 27% | 29% |
| Expense Ratio | 0.68% | 0.65% |
| % Small / Mid Cap | 9.2% | 10.6% |
In total, the two funds have nine of the ten same top ten components with the only difference coming from IDX's allocation to Adaro Energy and EIDO's holdings in Unilever Indonesia. And although EIDO has nearly twice the number of individual components, both ETFs are top-heavy, with the top ten holdings accounting for approximately 60% of total assets. IDX doesn't have a single security that takes up more than 7.5%, while EIDO's top three holdings make close to one-third of the total assets [see Five Head-to-Head ETF Matchups to Keep an Eye On]. And from a sector perspective, the composition is similar as well -- at least at the top. Both Indonesia ETFs have heavy allocations to financials -- a common characteristic of many emerging markets funds, since banks are often among the largest publicly-traded companies in developing economies. From there, the allocations differ slightly, with EIDO heavier in consumer companies (discretionaries and staples combine to account for more than a quarter of assets) and IDX giving its second largest sector weighting to materials. Both Indonesia ETFs also make big allocations to telecom, primarily through Telekomunikasi Indonesia.
In terms of expense ratios, the funds are pretty competitive, with EIDO charging 65 basis points compared to 68 for IDX. From a performance perspective, the funds have delivered near identical returns since EIDO launched in May of this year.
Verdict
Exposure to Indonesia is lacking in many of the most widely-held emerging markets ETFs on the market today; the country makes up less than 3% of two of the world's most popular emerging market ETFs, VWO and EEM. That suggests that many investors have little to no allocation to the Indonesian market, and that either fund profiled above would be a welcome addition. The two Indonesia ETFs available to U.S. investors have a lot in common: both are dominated by mega-cap and large-cap companies, and maintain big allocations to the financial sector. EIDO casts a wider net by offering exposure to nearly twice as many stocks as IDX, but both have ten stocks account for about three-fifths of total exposure. The most significant difference may come from the sector breakdown, as EIDO is heavier in consumer companies while IDX gives a bigger weighting to materials firms [also read Emerging Market ETFs: Seven Factors Every Investor Should Consider].
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Disclosure: No positions at time of writing, photo is courtesy of Gunawan Kartapranata.
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